Can APAC Lead In Adaptation Finance?

By Feng Hu 15 December, 2016

After two climate conferences, CWR’s Hu shares why APAC needs to take the lead in climate adaptation finance

Impacts of climate change seen across APAC from melting glaciers in the Himalayas to floods in coastal cities
With adaptation finance needs to reach USD300bn by 2030, the private sector's role should be bigger than 8%
Broader approach to adaptation needed incl.: cross-sector solutions, economically sound projects & clearer benefits

In the last two months, I attended two international climate conferences: one was the 5th Asia Pacific Adaptation Forum that focused on how to build greater partnerships between governments, civil society and business. The other was the 22nd Conference of Parties (COP22), which was the very first session for leaders and delegates around the world to discuss implementation of the “Paris Agreement”, which came into force on 4 November.

our task now is…to reduce greenhouse gas emissions & to foster adaptation efforts”

– Marrakech Action Proclamation

At both conferences, the general voices were that we need to act NOW and we need more finance. As stated in the “Marrakech Action Proclamation“, “our task now is to rapidly build on that momentum, together, moving forward purposefully to reduce greenhouse gas emissions and to foster adaptation efforts” (find the full list of decisions adopted at COP22 here).

COP22-was-held-in-Marrakech-shorting-after-the-Paris-Agreement-took-effective 2

For adaptation, almost no country is exempt from the impacts of climate change. In Asia Pacific, the impacts of climate change can be seen across the region from melting glaciers in the Himalayas to floods in coastal cities as well as rising sea levels in Pacific Islands. Accounting for 60% of global population and nearly 2/3 of global economic growth, adaptation efforts are more urgently needed in the APAC region.

The question is then how much is needed, and where to find the money.

Adaptation finance lags far behind mitigation

According to Climate Policy Institute (CPI), climate finance reached USD392 billion globally in 2014 (latest available): 92% went into mitigation, 7% to adaptation, and merely 1% was used to support projects with dual benefits (see left below chart).
Global Climate Finance Mitigation vs Adaptation
Obviously, mitigation has captured most of the climate finance flow, as it is much more straightforward and also easier for government and business to see incentives in investing in efforts such as renewable energy.

Adaptation only captured 7% of global climate finance, of which 92% came from public finance

Indeed, nearly 79% of mitigation finance went to such projects. Moreover, the private sector accounts for 71% of the entire mitigation finance.

As for adaptation, around 92% of the finance during 2013-2014 came from public money (see right above chart). But, this doesn’t mean we don’t need more finance towards adaptation. In fact, there is a huge gap in meeting actual needs.

The adaptation finance gap is widening…

UNEP_Adaptation Gap Report 2016 coverUNEP’s new report estimated the annual costs of adaptation today to be USD56-73 billion (>2x of current finance flows) and expected it to reach USD140-300 billion by 2030. The report warned that this gap will continue and is likely to widen.

Annual costs of adaptation to reach up to USD300bn by 2030…
…public finance won’t be enough

To narrow this gap, firstly it is necessary to grab as much from existing and proposed public climate finance as possible: for instance, the promised annual climate finance of USD100 billion by 2020 from developed countries. However, even if we can secure the USD100 billion and direct all of it to adaptation, it still won’t be enough.
Clearly, we also need to get the private sector involved and enhance its role in adaptation finance. This is also highlighted in COP22’s Decision on “Long-term climate finance”.

Private investors are asking for more bankable projects

There are certainly lots of barriers to overcome. During many discussions at COP22, one debate came up repeatedly: on one hand, civil societies and practitioners are calling for more finance towards adaptation; but, on the other hand, financial institutions and investors spoke frankly that there are not many “bankable projects” in adaptation.
China government representative called for prioritizing adaptation finance towards developing countries

Mitigation, adaptation & development are all intertwined…

Both sides have their sound reasons, but let’s stop drawing a hard line between mitigation and adaptation. As Nicolas Stern, President of the British Academy, pointed out during the High-level Ministerial Dialogue on Climate Finance, mitigation, adaptation and development are all intertwined as already shown in many examples such as decentralized solar and energy efficient transportation.

Thus, to attract more private investment, we should start talking about concrete opportunities and potential solutions, and what exactly the private sector can invest in.

So, a broader scope in adaptation?

According to the UNFCCC definition, adaptation is about “adjustments in ecological, social, or economic systems in response to actual or expected climatic stimuli and their effects or impacts”. So naturally, adaptation covers a wider range of activities than mitigation, from water resources management, agriculture, ecological protection & land use, urban infrastructure & industries, to monitoring & emergency response and public health. For instance, China’s National Climate Change Adaptation Strategies covers seven very different key task areas and five assurance measures (see graph below).
China's Climate Change Adaptation Strategies

Although covering a broader scope, around half of adaptation finance is dedicated to water & wastewater management projects

But currently, around half of adaptation finance is dedicated to water & wastewater management projects. In China’s national strategies, improving irrigation efficiency is one of the key tasks. China plans to invest >RMB139 billion (~USD20.2 billion) on highly efficient water-saving irrigation in four key regions by 2017/2018, which will help achieve the efficiency goal of 0.55 by 2020. Although all good moves, can we also scale up investments in other areas of adaptation?

Cross-sector solutions, new economic models & clearer benefits

A broader scope in adaptation also means that solutions need to be ‘unsiloed’ and should cross different sectors.

Take renewables for example, other than substituting thermal power generation, it can also play an important role in off-grid applications. Around 75% of China’s onshore wind and solar PV potential lies in the Northeast, where competition for water between energy and agriculture is high. These provinces account for about 14.2% of China’s total irrigation areas. Imagine replacing some of the diesel pumps and generators on the farm with renewables powered systems, it not only can bring dual benefits on carbon and water, but also help with current high curtailment rates.

Other than physical solutions, developing new economic opportunties & new financing mechanisms is also important

Moreover, solutions are not limited to physical ones. As Mark Brown, Finance Minister of the Cook Islands, highlighted during the Asia Pacific Adaptation Forum that building resilience can also be about soft adaptation in the community, such as bringing in new economic opportunities like e-commerce to vulnerable regions. In the case of China, the government is pushing for new financing mechanisms for water and climate adaptation, such as climate bonds and PPP.

Furthermore, we need to be specific about the socio-economic benefits of investing in natural adaptation and disaster risk reduction infrastructure. As wisely commented by Lucy Emerton, Chief Economist at the Environment Management Group, it “means little unless these benefits can also be captured, distributed, and translated into tangible and immediate gains”.

The private sector in APAC can act faster

Being Asian, I certainly would love to see the private sector in the APAC taking the lead in financing climate adaptation.

APAC accounts for >56% of global new investment in renewables

Asia Pacific is already leading in climate mitigation. According to latest report by REN21, in 2015, global new investment in renewable power & fuels reached USD286 billion, nearly 4x as much as in 2005: China alone accounted for 36% of the global total, and Asia Pacific as a whole accounted for over 56%.

Chinese Real Estate Industry Green Supply Chain White Paper cover
For adaptation, it’s relatively easier to engage the private sector in the urban areas. In China, the government is selecting 30 pilot cities in order to transform them to become ‘climate resilient cities’ by 2020. In these cities, 50% of the buildings are expected to meet relevant green building standards.

Businesses in relevant sectors are also starting to take action. During COP22, representatives of Chinese property companies such as Vanke presented a white paper on real estate industry’s green supply chain purchasing standard.

China’s real estate industry’s emission reduction commitments could mean USD39bn revenues for the national carbon market

The new initiative, currently comprised of ~70 companies with total annual sales >RMB1 trillion, commits to achieve annual emission reductions along the entire supply chain to 0.89 billion tonnes of CO2 equivalent by 2025, 2x of UK’s emissions in 2015. If future carbon price could increase to the hoped-for level of RMB300/t, revenues from emission reductions trading in the forthcoming national market would be as large as RMB267 billion (~USD39 billion).

The push for green buildings will also involve water saving & efficiency, which will bring new opportunities as well. A recent national plan requires all the new public buildings & government residential buildings to install water recycling systems after 2018. Although such mandatory requirements may not immediately extend to commercial buildings, as water price reform and water rights trading progress, the property developers will likely act before regulation kicks in. That could bring a chain of opportunities for many solution and service providers.

Asia Pacific is the most economically vibrant region in the world, not to mention that it has three of the world’s five largest economies, China, India and Japan. If we look at global climate bond markets, China has grown from zero to No.1 in two years. We can believe that within a few years, the private sector in Asia Pacific will lead in global adaptation finance and provide a lot more inspiring business cases for the rest of the world.

We have strong reasons to believe that APAC private sector can lead in adaptation finance in a few years
…indigenous & traditional knowledge and practices from the region can also be applied in adaptation

Good indigenous & traditional knowledge and practices can be used for adaptation
In addition, the region is packed with rich and diverse cultures and there is a great wealth of indigenous and traditional knowledge and practices that can already be applied and scaled up in our adaptation efforts. In a 2016 UNFCCC’s report that compiles 21 such good practices globally, 11 of them come from Asia Pacific.

Let’s take the lead, APAC!

Further reading

  • 5 Years On – Have We Made A Difference? – As China Water Risk turns five years old, Debra Tan reflects on its journey & milestones. Have we made a difference? What next for the coming five years?
  • Dear Santa, Less Stuff Please – This Christmas China Water Risk’s Dawn McGregor draws attention to the trails of waste left by our gifts, made worse with low-recycling rates & increasing e-commerce orders. She wants less stuff but that doesn’t mean no presents
  • Buying Electronics Can Pollute Our Future – This Christmas Hongqiao Liu wants you to think twice before buying that new electronic device as key rare earths & other critical raw materials are causing pollution in China. Companies also need to act & cut out built-in-obsolescence
  • Playing With Trees At Christmas – Trees can play a key role in protecting water.  With this is mind China Water Risk’s Hubert Thieriot tests out a new ‘toy’, the World Resources Institutue’s Global Forest Watch map, on China. See what he finds
  • Water In: Beer, Crisps & Chocolate – Food & drink help create a festive atmosphere in Christmas but how much water do they use? China Water Risk’s Woody Chan looks into the water footprints of beer, chocolate & crisps, the impact on China & potential solutions
  • COP21: What Paris Means For China – All eyes are on China, the largest contributor to global emissions as it transitions to a low carbon future. See what Paris means for China from carbon trading, peak emissions to carbon-intensive industries
  • Paris Agreement: Food & Water Still At Risk – Even if all pledges made at COP21 are carried out, global staple crops face increased failures and 1.5 billion more people are to face water stress by 2050. Massachusetts Institute of Technology’s Mark Dwortzan shares more findings & solutions from their report
  • Financing Water Resilience: Climate Bonds for China – Green or “climate” bonds is a rapidly growing market but there are verification concerns plus gaps for water-related investments. AGWA’s John Matthews & Climate Bond Initiative’s Anna Creed & Lily Dai introduce the new water climate bond standard that addresses these issues
  • Water PPPs To Lead In China – All new water & wastewater projects in China need to follow the Public-Private-Partnership (PPP) model. Will this mean big change and how have other water-related projects been funded in China? China Water Risk’s Yuanchao Xu takes a look
  • Wind & Sun: Relief For China’s Dry North – China’s North is parched but is home to a significant amount of coal reserves & arable land. Can wind & solar power help bring relief? CWR’s Thieriot on how but be warned, challenges remain
  • 8 Reasons to Invest in Irrigation in China – To grow 75% of total grains & 90% cash crops, China’s irrigated areas need water equivalent to the Pearl River flow. With an additional 18 million hectares to adopt water-saving tech by 2030, CWR’s Hu says investment in irrigation is worth exploring
Feng Hu
Author: Feng Hu
Having previously led CWR’s work on water-nomics, Feng now sits on our advisory panel to help us push the conversation on integrating water considerations in planning sustainable transition and mobilising finance toward climate and water resilience. Feng currently works on ESG advisory at a regional financial institution. Prior to that, Feng worked as Sustainable Finance Research Manager APAC at V.E, part of Moody’s ESG Solutions. During his time at CWR, he initiated and led projects for CWR including the joint policy briefs with China’s Foreign Economic Cooperation Office of the Ministry of Environmental Protection on the water-nomics of the Yangtze River Economic Belt. Feng expanded the water-nomics conversation beyond China by co-authoring CWR’s seminal report “No Water No Growth – Does Asia Have Enough Water To Develop?”. He has given talks on water-nomics and other water issues at international conferences, academic symposiums, corporate trainings and investor forums. Previously, Feng also sat on the Technical Working Group of the Initiative for Climate Action Transparency (ICAT) and worked as a senior carbon auditor on various types of climate change mitigation projects across Asia and Africa. Feng holds two MSc degrees – one in Finance (Economic Policy) from SOAS University of London and the other in Sustainable Resource Management from Technical University of Munich – and a BSc degree in Environmental Science from Zhejiang University.
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